Reviewing My IRA Options

The other day, a reader, Matt, sent me an e-mail in response to my Zecco IRA Rollover. He asked (I’m paraphrasing):

I have a question about the Zecco IRA account. You figured a 0.036% expense ratio and I understand how you calculated it – $30 annual fee/$80k balance. If I had an account of ETF’s, wouldn’t I have to pay $30 per year plus any sort of expenses for the fund itself? Or does the $30 per year replace the fees for the ETF?

It was a great question and I realized that it was one that I clearly overlooked. The answer is simply “yes.” The companies that make the ETFs available have to eat and pay rent too. There’s no way out of ETF expenses. The bright side is that they are typically minimal – the smallest in the industry. That’s the big advantage of going with indexes. Some ETFs have an expense ratio of around .07% – see Vanguard Total Market Index (ticker: VTI). Considering that I’m probably paying close 0.75% or more in some actively managed mutual funds in my 401K now, I’d be pretty happy to push that down to .10-.11% (.07 for the ETF and .036 to Zecco). A half a percent (or in this case slightly more) in 30 years is very significant on an $80,000 investment.

Before settling on Zecco for my rollover IRA, I considered two other options:

I could go with a brokerage like Ameritrade (where I have my Roth IRA). I pay $10 commission per trade there to buy ETFs. Typically, I make one trade a year (a buy with my yearly contribution). It’s technically a cheaper if I want to continue to do that – just $10 a year to buy and then selling expenses in the future. However, that commission prevents me from rebalancing or contributing a little each month.

I could go with Vanguard or Fidelity and buy low-expense mutual funds. This option would limit my investing options significantly. For instance I couldn’t find a way to invest in gold or oil with Vanguard’s options.

In the end, this may be nitpicking. All the options keep expenses much lower than the national average. This little bit of nitpicking could translate to thousands of dollars in the future, so it’s worth trying to get it right. I feel that Zecco currently gives me the most flexibility at the lowest cost.

Comments

Well, that’s what it’s all about…wanting to be able to pick your investments all in one place for as little as possible. I’m not really into oil/gold investing, so Vanguard seems to have everything I’d want. But it’s not for everyone.

However, since the SP500 is a cap weighed index, it’s largely made up of the biggest, say, 25 companies, so you can get pretty close in terms of tracking error. Just start buying them one at a time starting with the biggest (Exxon Mobile).

Obviously diversifying on your own requires some serious money unless someone knows where to get a zero fee account with free trades. That would be sweet!!

@ Mrs. Micah – actually I prefer to have my investments spread out over more than one broker, just in case.

Yes Zecco has $0 trades. Scottrade may be better for you depending on how much you trade.

With Zecco, I could actually buy one or two shares of a pile of companies. So if I think the XLK doesn’t have enough Microsoft in it (it really has plenty of of MSFT for me), I could buy some XLK and some MSFT. If I see MSFT go up and XLK go down, I could take some off from MSFT and buy more XLK. That gets a little close to trading you still have to worry about the spread between the bid/ask prices.

At least ETFs and Vanguard HAVE low fees in the US. Here in Australia the cheapest ETFs still have fees totalling around 0.5%pa and Vanguard’s retail funds charge 0.75% on low balances, and only drop to 0.25% for that part of an investment in a fund that is above $100,000! (Vanguards wholesale index funds have lower fees, but you have to invest via a “wrap” service which will be charging there own set of fees). Still, it’s better than the retail mutual funds in Australia, which charge a whopping 1%-2.5% or more pa….

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Glad you landed at Zecco for an IRA. You’re absolutely right – having complete flexibility (with the $0 commissions) is incredibly valuable for most investors, especially with incremental contributions to retirement accounts. What I think you’re overlooking is the Zecco community that helps people make better investing decisions. You might be interested in one of our retirement investing discussion groups? http://www.zecco.com/zeccoshare/groups/Group.aspx?groupid=104

I found that since you can only contribute $4-5000 per year that I only invest in one or two securities in my IRA each year. So the small fee for the transactions is not a major factor for my IRA. You are right to point out that that decision boils down to how you handle your IRA investments.

What I have found most surprising, as I have been tracking ETFs against Vanguard index funds and managed no-load funds, is how poorly the ETFs have performed over the last year.

You can see the details as I track comparable portfolios each week on my blog:

I personally own ETFs, Index funds, and Managed funds and am a fan of all three, depending on what sector or category I am investing in and the very important point you mention- re-investing in small amounts is not practical if you have to pay a commission.

I am sticking with the ETFs I own, but I am really surprised that the diversified portfolio of ETFs I track has been spanked by the comparable portfolio of mostly managed mutual funds that invests in the same categories, since last May. The Vanguard portfolios have beaten the ETFs as well.

$0 commissions also available at Wells Fargo for combined balances (investments + banking) over 25K. I have IRA, Roth IRA and a taxable brokerage account with them so I get 100 free trades per account (300 total). Not a big deal saving $60 a year at Zecco ($30 for an IRA, $30 for a Roth IRA) but it’s still better than paying the fee.

I agree with protecting your savings and, like the rest of you, have no confidence in our Government’s interest in our well being. That said, Danial Murial, you overestimate the protection that our laws actually offer you. The Government can and will confiscate anything it feels like taking. The idea that certain Types of gold, such as old american coins, are not confiscatable is not supported by law, but instead is a bit of urban legend that’s developed from the fact that FDR simply chose that direction back when he confiscated our gold. He could have, but simply didn’t. It set a precedent that everyone on the internet refers to, but be aware, the law does not prohibit the confiscation of your “coin collection”.

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